The Great Panic of 2016

There is no diplomatic way to articulate what happened with the stock market in early January except to say that we are in panic mode! Investors had to decide whether they wanted to go with the conventional bearish wisdom and bail on stocks. Indeed, nobody would think one was a genius for staying the course or better yet, buying stocks when there was blood in the streets. Nope, crazy was more like it! However, at least for now, some of the “crazy” ones are coming out ahead!

During the first two weeks of January, the stock market, measured by the S&P 500 index declined 8 percent. This decrease was the first time we have been down that much this early in the year in over three decades! Furthermore, many “head-for-the-hills” doomsayers masquerading as sophisticated investment analysts were predicting an alarming scenario that called for a repeat of 2008. They wanted us to think the unthinkable. As Charlie Brown would say, we are doomed. Some of these pouting pundits of pessimism proclaimed that technology and automation would eliminate half of the jobs in the developed world! Yep. The talking heads were out in full force hyperventilating over the inevitable demise of the US stock market.

What many people did not and do not understand is that these doomsters have been singing the same song since 2008, while the S&P 500 increased over 200 percent from its March 2009 lows. If we had listened to them at that time, we would have missed one of the greatest advances in the history of the S&P 500. Ah, it feels good to get that off my chest. Now we can take a more academic approach.

When we are in the middle of so much anxiety and folks are stampeding to the exit door, it is hard to recognize that the theater is not on fire. Nevertheless, it was déjà vu all over again, as far too many folks hit the panic button, as their rational thinking went out the window. When selling stopped, and all the bears were exhausted, there appeared nothing else to do but buy! Friends, this is called capitulation! Regardless, many investors apparently believed this was going to be the first time in market history that the market goes down and stays down forever.

We must understand that periodic crises are inevitable, and though past performance is not indicative of future results, recovery has followed. Moreover, let us not lose focus with the fact that since 1950, the S&P 500 has experienced a decline of between 5 percent and 10 percent in 35.5 percent of all calendar years, which is another way of saying that this recent drawdown was entirely reasonable. Sip on that for a second. Swirl it around. Savor the essence. No, do not spit it out. Take a good long taste. Painful yes, but true nonetheless.

Folks, if we know that about 35 percent of the time that we will experience a stock market decline in the range of 5 to 10 percent, then why would we ever think of hitting the panic button? I know why. Because when panic fills the air again, I will hear, as I always do, the misinformed peeps uttering those four annoying words: This time is different. Of course, it is different. So what if this time is different? Who cares? The fact is that market declines are normal. We must get over it or do not play the investing game.

Perhaps the words from the “Forest Gump of Wall Street,” Warren Buffet, will help you stay the course the next time the market enters its normal and frequent decline: “For 240 years it has been a terrible mistake to bet against America, and now is no time to start. America’s golden goose of commerce and innovation will continue to lay more and larger eggs” (from Buffet’s 2015-year end annual letter).

My final advice is to beware of futurists and carry some salt. In other words, just stay the course. I believe in stick ability. Do not do something, just stand there! Now take a deep breath and turn the page.

Wells Fargo Advisors LLC, Member SIPC, is a Registered Broker-Dealer and a separate non-bank affiliate of Wells Fargo & Company.

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